M/S Mangalam Cement Ltd v. The Commissioner Ofincome Tax & Anr

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR. D.B. Income Tax Appeal No.22/2001 M/s Mangalam Cement Ltd. Vs. The Commissioner ofIncome Tax & Anr. DATE OF JUDGMENT ::: 30.8.2016HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE AJAY RASTOGI Mr. Sanjay Jhanwar, for the appellant.Mrs. Parinitoo Jain, for the respondent. ***** (1)By way of this appeal, the assessee haschallenged the judgment & order of the Income TaxAppellate Tribunal dismissing the appeal preferred by theassessee, confirming the order of the CIT (Appeals).(2.1)The brief facts of the case are that the assessee-company has claimed expenses vis-a-vis travellingexpenses, entertainment expenses, guest expenses andother expenses which are claimed on the basis of mercantilesystem of accounting actual payment of money is irrelevantconsideration and incurring of liability is sufficient. TheAssessing Officer while assessing income of the assessee forthe assessment year 1991-92, has given expensesadmissible under the Rules on the accrual basis on the note of mercantile basis and the same view was confirmed by the Tribunal. (2.2) This court while admitting the appeal framed following substantial questions of law:- “1. Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was justified in holding thatthe Commissioner of Income Tax had jurisdictionto initiate proceedings and assume jurisdictionunder Section 263 of the Income Tax Act, 1961and the revise the original assessment order? 2. Whether the Tribunal was right in law insustaining the the conclusion arrived at by theCommissioner under Section 263 of the Act andheld that order of the assessing officer iserroneous and prejudicial to the interest ofrevenue without deciding issue on merits? 3. Whether the Tribunal is right in stating thatthe directions of the CIT in revisionary orderunder Section 263 can be dealt with only when itis brought before the Tribunal, when the appealagainst these directions was already beforeTribunal and there cannot be any other appealagainst the said directions? 4. Whether the term 'paid' defined in section43(2) of the Act does not imply and furthersupport the interpretation that in mercantilesystem of accounting actual payment of moneyis irrelevant consideration and incurring ofliability is sufficient?” (3.1) The counsel for the appellant has contended that in view of the decision of the Hon'ble Supreme Court in thecase of Commissioner of Income Tax Vs. WoodwardGovernor India (P) Ltd. (2009) 312 ITR 0254 & moreparticularly para no. 30 to 34, which reads as under:- “30. Section 43Astarts with a non obstante clause.Section 43A(1)overrides the other provisions only asregards cases falling under that sub-section. For instance, in a case where the asset is acquired, or the liability to payin foreign exchange arises, after the change in the rate ofexchange, the said sub-section has no application and thegeneral principles of law must be applied in decidingwhether the actual cost is increased or reduced as a resultof such change. In other words, Section 43A(1)appliesonly where as a result of change in the rate of exchangethere is an increase or reduction in the liability of theassessee in terms of the Indian rupee to pay the price ofany asset payable in foreign exchange or to repay moneysborrowed in foreign currency specifically for the purpose ofacquiring the asset.Section 43A(1), therefore, has noapplication unless the asset is acquired and the liabilityexisted, before the change in the rate of exchange takeseffect. In such a case,Section 43Acontemplatesrecomputation of the cost of the assets for the purposes ofdepreciation [Sections 32and 43(1)], and also as regardscapital assets for scientific research [Section 35(1)(iv)] andalso regarding patent rights or copyrights [Section 35A]. 31. As held in Arvind Mills case (supra) increase ordecrease in liability in the repayment of foreign loan shouldbe taken into account to modify the figure of actual cost inthe year in which the increase or decrease in liability ariseson account of the fluctuation in the rate of exchange. Thus,the adjustments in the actual cost are to be madeirrespective of the date of actual payment in foreigncurrency made by the assessee. This position also findsplace in the clarification issued by the Ministry of Financedated 4.1.1967 which inter alia reads as under: "2. The Government agrees that for the purposes of thecalculation of depreciation allowance, the cost of capitalassets imported before the date of devaluation should bewritten off to the extent of the full amount of the additionalrupee liability incurred on account of devaluation and notwhat is actually paid from year to year. The proposed legalprovision in the matter is intended to be framed on thisbasis." (emphasis supplied) 32. One more aspect needs to be mentioned.Section 43(1)defines actual cost for the purpose of grant of depreciationetc. to mean "the actual cost of the assets to theassessee". Till the insertion of the unamended Section 43Athere was no provision in the Income-tax Actfor adjustmentof the actual cost which was fixed once and for all, at thetime of acquisition of the asset. Accordingly, no adjustmentcould be made in the actual cost of the assets for purposesof grant of depreciation for any increase/decrease ofliability subsequently arising due to exchange fluctuation.Consequently,Section 43Awas introduced in the ActbyFinance Act, 1967 w.e.f. 1.4.1967 in the above terms toprovide for adjustment in the actual cost of assetspursuant to change in the foreign currency exchange rates.As a consequence of the insertion of the said section, it became possible to adjust the increase/decrease in liabilityrelating to acquisition of capital assets on account ofexchange rate fluctuation, in the actual cost of the assetsacquired in foreign currency and for, inter alia, depreciationto be allowed with reference to such increased/decreasedcost. This position is also made clear by Circular No. 5-Pdated 9.10.1967 issued by CBDT. One more point needs tobe mentioned.Section 43A(unamended) corresponds topara 10 of AS-11 similarly providing for adjustment in thecarrying cost of fixed assets acquired in foreign currency,due to foreign exchange fluctuation at each balance sheetdate. The relevant para reads as follows: "10. Exchange differences arising on repayment ofliabilities incurred for the purpose of acquiring fixed assets,which carried in terms of historical cost, should be adjustedin the carrying amount of the respective fixed assets. Thecarrying amount of such fixed assets should, to the extentnot already so adjusted or otherwise accounted for, also beadjusted to account for any increase or decrease in theliability of the enterprise, as expressed in the reportingcurrency by applying the closing rate, for making paymenttowards the whole or a part of the cost of the assets or forrepayment of the whole or a part of the monies borrowedby the enterprise from any person, directly or indirectly, inforeign currency specifically for the purpose of acquiringthose assets." "10. Exchange differences arising on repayment ofliabilities incurred for the purpose of acquiring fixed assets,which carried in terms of historical cost, should be adjustedin the carrying amount of the respective fixed assets. Thecarrying amount of such fixed assets should, to the extentnot already so adjusted or otherwise accounted for, also beadjusted to account for any increase or decrease in theliability of the enterprise, as expressed in the reportingcurrency by applying the closing rate, for making paymenttowards the whole or a part of the cost of the assets or forrepayment of the whole or a part of the monies borrowedby the enterprise from any person, directly or indirectly, inforeign currency specifically for the purpose of acquiringthose assets." 33. As stated above, what triggers the adjustment in theactual cost of the assets, in terms of unamended Section43Aof the 1961 Act is the change in the rate of exchangesubsequent to the acquisition of asset in foreign currency.The section mandates that at any time there is change inthe rate of exchange, the same may be given effect to byway of adjustment of the carrying cost of the fixed assetsacquired in foreign currency. But for Section 43Awhichcorresponds to para 10 of AS-11 such adjustment in thecarrying amount of the fixed assets was not possible,particularly in the light of Section 43(1). The unamendedSection 43Anowhere required as condition precedent formaking necessary adjustment in the carrying amount ofthe fixed asset that there should be actual payment of theincreased/decreased liability as a consequence of theexchange variation. The words used in the unamendedSection 43Awere "for making payment" and not "onpayment" which is now brought in by amendment toSection 43Avide Finance Act, 2002. 34. Lastly, we are of the view that amendment of Section43Aby the Finance Act, 2002 w.e.f. 1.4.2003 isamendatory and not clarificatory. The amendment is incomplete substitution of the section as it existed priorthereto. Under the unamended Section 43A adjustment tothe actual cost took place on the happening of change inthe rate of exchange whereas under the amendedSection43A the adjustment in the actual cost is made on cash basis. This is indicated by the words "at the time of makingpayment". In other words, under the unamended Section43A, "actual payment" was not a condition precedent formaking necessary adjustment in the carrying cost of thefixed asset acquired in foreign currency, however,under amended Section 43A w.e.f. 1.4.2003 such actualpayment of the decreased/enhanced liability is made acondition precedent for making adjustment in the carryingamount of the fixed asset. This indicates a completestructuralchangebroughtaboutin Section43A vide Finance Act, 2002. Therefore, the amendedsection is amendatory and not clarificatory in nature.” (3.2) In D.B. Income Tax Appeal No.38/2000 in the case of Gillette India Ltd. Vs. The Commissioner of Income Tax,Udaipur and anr., the Division Bench of this Court, in whichone of us had been the member of the Bench, has alsoextracted the principal laid down in the case of Woodward inpara 13 of the judgment, which reads as under:- (3.2) In D.B. Income Tax Appeal No.38/2000 in the case of Gillette India Ltd. Vs. The Commissioner of Income Tax,Udaipur and anr., the Division Bench of this Court, in whichone of us had been the member of the Bench, has alsoextracted the principal laid down in the case of Woodward inpara 13 of the judgment, which reads as under:- “As stated above, one of the main argumentsadvanced by the learned Additional Solicitor General onbehalf of the Department before us was that the word"expenditure" in Section 37(1) connotes "what is paidout" and that which has gone irretrievably. In thisconnection, heavy reliance was placed on the judgmentof this Court in the case of Indian Molasses Company(supra). Relying on the said judgment, it was sought tobe argued that the increase in liability at any point of timeprior to the date of payment cannot be said to have goneirretrievably as it can always come back. According to thelearned Counsel, in the case of increase in liability due toforeign exchange fluctuations, if there is a revaluation ofthe rupee vis-`-vis foreign exchange at or prior to thepoint of payment, then there would be no question ofmoney having gone irretrievably and consequently, therequirement of "expenditure" is not met. Consequently,the additional liability arising on account of fluctuation inthe rate of foreign exchange was merely acontingent/notional liability which does not crystallize tillpayment. In that case, the Supreme Court wasconsidering the meaning of the expression "expenditureincurred" while dealing with the question as to whetherthere was a distinction between the actual liability inpresenti and a liability de futuro. The word "expenditure"is not defined in the 1961 Act. The word "expenditure" is,therefore, required to be understood in the context inwhich it is used. Section 37 enjoins that any expenditurenot being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly andexclusively for the purposes of the business should beallowed in computing the income chargeable under thehead "profits and gains of business". In Sections 30 to36, the expressions "expenses incurred" as well as"allowances and depreciation" has also been used. Forexample, depreciation and allowances are dealt with inSection 32. Therefore, Parliament has used theexpression "any expenditure" in Section 37 to coverboth. Therefore, the expression "expenditure" as used inSection 37 may, in the circumstances of a particularcase, cover an amount which is really a "loss" eventhough the said amount has not gone out from thepocket of the assessee. In cases where, e.g., the rate of dollar rises vis-`a-vis theIndian rupee, there is an expense during that period. Theimportant point to be noted is that AS-11 stipulates effectof changes in exchange rate vis-`a-vis monetary itemsdenominated in a foreign currency to be taken intoaccount for giving accounting treatment on the balancesheet date. Therefore, an enterprise has to report theoutstanding liability relating to import of raw materialsusing closing rate of exchange. Any difference, loss orgain, arising on conversion of the said liability at theclosing rate, should be recognized in the P&L account forthe reporting period.” (4.0) Counsel for the appellant has further contended theHon'ble Supreme Court in reference to the provisions underSection 43(2) has held certain principles on mercantilesystem and has extracted the accounting system which areprevailing with the assessee should be accepted. (4.1) Counsel for the respondent-department has contendedthat in view of the concurrent finding and in view of the factthat such expenses are not allowable unless being paidunder the relevant assessment year, the view taken by theauthority may not be disturbed. (5.0) Heard the learned counsel for the parties. (5.1) In view of the decision of the Supreme Court andjudgement of this court having extracted the principles laid (4.0) Counsel for the appellant has further contended theHon'ble Supreme Court in reference to the provisions underSection 43(2) has held certain principles on mercantilesystem and has extracted the accounting system which areprevailing with the assessee should be accepted. (4.1) Counsel for the respondent-department has contendedthat in view of the concurrent finding and in view of the factthat such expenses are not allowable unless being paidunder the relevant assessment year, the view taken by theauthority may not be disturbed. (5.0) Heard the learned counsel for the parties. (5.1) In view of the decision of the Supreme Court andjudgement of this court having extracted the principles laid down by the supreme court that merely on the basis thatunder the mercantile system which has been followed by theassessee actual expenses which are not incurred, ifremained unpaid, it is to be allowed and in light thereof theissue no.4 is required to decided in favour of the assessee &against the department. The issues no. 1 to 3 are notrequired to be answered. In view of the above, the appeal is allowed. Theexpenses which were not allowed are allowed. (Ajay Rastogi), J. (K.S. Jhaveri), J. Brijesh9.